UK Edition
Bankers are up in arms about attempts to cut their salaries in favour of bigger bonuses, amid fears private school fees will become unaffordable without a guaranteed high income.
An EU cap on the size of bankers bonus was scrapped last year in an effort to boost the City’s competitiveness. Officials at the Bank of England argued that the cap had done little to curb excessive pay, instead simply inflating salaries.
Scrapping the cap should in theory allow banks to incentivise performance by weighting rewards more heavily towards bonuses.
However, bankers who have seen their salaries ramp up to offset the bonus cap have complained that lower fixed pay could stretch their finances.
The tensions mean City institutions have delayed changing pay deals after trading floors became “moan central”, according to an executive at one major investment bank.
“Everyone was p----- off, [the changes] were scrapped after everyone moaned,” said the executive. “People were concerned about school fees or because they like the money to punt around investing.”
Day fees for private schools can range from around £10,000 a year to almost £40,000, while boarding fees can cost more than £50,000 a year. Labour’s plans for a VAT raid on private schools would add 20pc to these figures.
Bankers have now been told that management are “weighing up options on what to do about bonus cap changes - specifically on fixed allowances,” another executive said.
An insider at a rival bank said they are also debating what to do, fearing that if they become the first to reduce salaries “others could have a competitive advantage and look to poach staff”.
Bonuses made up 44pc of bankers’ incomes in the run up to the financial crisis, with top traders and executives often in line for multi-million pound payouts in good years.
However, bonuses were capped at two times annual salaries by Brussels in 2014 in order to end excessive risk taking by those chasing huge rewards.
Rather than prompting lower pay across the sector, banks have simply bumped up base salaries in order to attract and retain top talent.
Since 2008, average pay in the financial services and insurance sector has risen by 83pc in nominal terms – almost double the rate of inflation over the same period.
Shifting back towards bonuses will rob bankers of high, guaranteed monthly payouts and instead replace a significant portion of their rewards with an annual lump sum. Adding to the anxiety is the fact bankers will not know how big a bonus they will get, given it is down to managers to decide.
Other rules introduced after the financial crisis also remain, including a requirement for at least half of bonuses to be made up in shares or non-cash incentives and at least 40pc of payments to be deferred for at least four years.
Banks can also block or claw back bonuses in the event of misconduct or underperformance.
Anindya Ghosh Chowdhury, a financial services adviser at Mazars and a former lead auditor at the Bank of England, said: “Bankers are worried about a cut in their allowances that fund their lifestyles.
“Banks themselves will be carefully considering the behavioural economics of any adjustment to remuneration policies. Whatever they decide to do will ultimately impact bankers’ behaviour.”
The Bank of England confirmed in October that Britain would scrap the cap as part of a post-Brexit overhaul, which it said would enable firms to “react to downturns” and increase competitiveness. Labour said last week that it would not reinstate the restriction on bonuses.
Sam Woods, chief executive of the PRA, told MPs last year that the only effect of the cap had been to “increase the fixed pay of bankers. As bankers come up close to the cap… in the following year, their base pay gets a boost of about 15pc”.